INSIGHT: Shale research highlights Europe cost savings, GDP gains

26 November 2013 16:50  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The development of the EU’s shale gas resources could cut wholesale and domestic gas and electricity prices, reduce the need for imports, lift industry and create jobs, research undertaken for the International Association of Oil & Gas Producers (OGP) suggests.

Unit costs for producers of basic chemicals could fall by more than 1% by 2050, the study from management consultants Poyry and Cambridge Econometrics says.

While it is highly unlikely that the exploitation of the EU’s shale gas reserves will run smoothly, or necessarily cheaply, the research highlights clear opportunities for the bloc’s governments, industries and consumers.

The question is how quickly, if at all, people and politicians can be persuaded to accept shale gas as a major component of the energy mix.

The opposition to shale gas and oil fracking in the EU is significant and there is clearly not the geological data let alone the drilling and fracking expertise that will see shale deposits developed in the near future.

However, Europe’s energy costs look increasingly high compared with some other parts of the world and the chemical industry suffers as a result when production costs are set against those in North America and in the gas and oil rich Middle East.

The German chemical industry trade group the VCI this week, for instance, said that currently electricity is 2.5 times more expensive in Germany than it is in the US and that the German gas price is three times higher.

But fracking is increasingly discussed across the region with government and public support, and opposition, largely different in each of the 28 EU member states.

The research sets out the opportunities and the possible constraints to shale gas production in the EU.

“The development of shale gas in Europe could add as many as one million jobs to the economy, make industry more competitive and decrease the region’s dependence on energy imports,” the OGP says.

Working up two shale scenarios, the Poyry study shows that the EU’s energy markets and wider economies can benefit from shale. Exploitation on the scale seen in the US is unlikely, however, and costs will inhibit the development of some wells and resources.

The management consultants lay out some of the challenges including further mapping and appraisal of the EU’s known shale deposits, the development of an onshore rig manufacturing and drilling industry, and both political and public support.

“Whilst a US style reduction in prices is not expected, the production of European shale gas should result in wholesale gas prices that are lower than they otherwise would have been,” Poyry and Cambridge Econometrics say.

There will be a beneficial impact on the gas and electricity markets. Industrial competitiveness, a thorny issue for the European chemicals sector now, will improve, particularly in energy intensive industries, they suggest. Household energy prices should reduce as wholesale energy costs savings are passed through to the consumer.

“Strong political will is expected to be necessary in order to secure the level of support that will be required to achieve large scale production of shale gas in Europe,” they warn, however.

The study provides a relatively conservative estimate of shale reserves in the 28 EU member states and the savings in energy costs that successful large-scale fracking might produce.

Poyry suggests that there are 54,000 cubic metres (54tcm) of recoverable, what it calls “risked”, shale gas resources in the EU compared with a 68tcm estimate from the US Energy Information Administration (EIA) for Europe, which includes deposits in countries such as Russia and the Ukraine.

Working with publicly available information and cost estimates the consultants assume that by 2020 shale gas can be produced in the EU at a breakeven for between $5/MMBtu and $13/MMBtu. The weighted average cost for EU production is €9.1MMBtu. This is considerably higher than the current natural gas price in the US but lower than current natural gas prices in northwest Europe.

Poyry does suggest that production costs could fall over time as greater fracking experience is gained and efficiencies introduced.

Under the consultants’ ‘Some Shale Scenario’ and ‘Shale Boom Scenario’ they see wholesale gas prices falling by 6% and 14% respectively over the 2020 to 2050 period and wholesale electricity prices dropping by 3% or 8%.

Wholesale energy cost savings would be €765bn ($1,034bn) under the ‘Some Shale Scenario’ and €1,700bn under the ‘Shale Boom Scenario’, they say. Gas import dependency could fall from 89% in 2035 to 78% in Some Shale and 62% in Shale Boom by 2050.

“The production of shale gas in Europe does not affect the growth of renewables under either shale gas scenario, but it does reduce coal burn in electricity generation,” they add.

Working the analysis up to the macroeconomic level indicates that EU GDP could increase cumulatively by either €1,700bn or €3,800bn under the two scenarios between 2020 and 2050.

Cambridge Econometrics shale gas unit costs savings

($1 = €0.74)

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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